Now or Never

Are condo auctions a “deal” or a “bait and switch”?

Half of the people in the room have never done this before. The sharp-dressed young auctioneer tries to ease the anxiety of the inexperienced buyers, who associate auctions more with livestock than the “vivid hues, crisp geometrics and warm, abundant light” of condo catalogue copy.

“You’re going to understand everything I say,” he promises.

Soon, during a “practice” auction, he’s calling out bids at a rapid, barely intelligible clip. As bidders wave their slips of yellow paper, the price of an imaginary home goes from $100,000 to $172,000 in less than a minute.
People do get “caught up in the frenzy,” the auctioneer, Ty Beahm, says.

An atmosphere of frenzy is just what auctioneers hope to create. Which is partly why critics call their tactics unfair and misleading.

Beahm works for Kennedy Wilson, a California company hired for a sales push by the developers of Zocalo condominiums on Avenida Rincon. With some 2,300 homes for sale around the city, a couple of dozen condos in a mostly empty development near a busy highway are getting all the attention. If nothing else, it shows the power of advertising.

Through 2005, near the peak of the nationwide housing bubble, an average of 206 homes sold every month in Santa Fe. In the 12 months ending in August 2009, an average of 96 homes sold each month, according to figures compiled by Southwestern Title and Escrow General Manager Alan Ball.

With hundreds more homes for sale and a lot fewer people buying them, it now takes three times longer for the city’s housing inventory to turn over. Not only that, it’s become very tough for most people to get a mortgage. Sellers are getting desperate, dropping prices and resorting to unusual sales tactics.

Such is the backdrop for the Zocalo auction.

The advance publicity—in SFR and both Santa Fe daily newspapers—has so far failed to elucidate whether the auction is a chance to snap up luxury condos at steep discounts, a high-pressure sales scam—as some frustrated buyers at similar auctions have claimed—or some combination of both.

These were the questions on people’s minds at a Sept. 27 “how to buy” seminar.

Zocalo’s information office is, like the surrounding condos, painted in bright, solid, Southwesty colors. The conference room, overstuffed with approximately 100 people, is fuchsia. A show of hands reveals that half of the attendees have never been to an auction before—which is typical, in auctioneer Beahm’s experience.

But some of the prospective buyers have done their homework. They want to know whether shoddy concrete in one unit has been fixed or simply carpeted over, why some homes already in escrow are still listed as for sale and what opportunities they’ll have to get an independent inspection before closing a purchase.

A few ask Beahm about the “reserve price.” It’s an important term, but one the seminar hosts gloss over.

The “reserve price” is the minimum bid a seller will accept. It matters far more than the $90,000 “starting bids” Zocalo hypes in its advertising. Because the reserve price is secret, the auction’s rules favor the seller. In this case, the seller is Zocalo’s developer, Don Tishman, with partners Edward Gilbert, Snow Moore and Will Browning.

One man asks how he can learn the reserve price for a unit. Beahm dodges.

“I don’t know that the seller knows what the reserve is. I don’t know that anyone knows what these homes are worth, especially in today’s market,” Beahm says.

The man follows up: If the seller doesn’t know the price, then who does?

“As of now, I don’t know,” Beahm replies.

Another prospective buyer chimes in. It’s not that no one knows the price, he says, it’s that “nobody’s willing to release it.”

A wave of grumbles passes through the aisles. Beahm defuses the tension with a self-deprecating joke. “I’m not the seller. If I were, I wouldn’t be working here today,” he says.

After the seminar, Beahm declines comment with a smile.

According to its website, Kennedy Wilson sold 25 condos last year at an auction for The Alameda, a Southside development with views of the back side of Best Buy and TJ Maxx
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David Ferranti, Kennedy Wilson’s project manager for the Zocalo auction, tells SFR auctions are an increasingly popular way to sell real estate. Indeed, his company helped pioneer the technique.
“It’s a deal for the folks buying,” Ferranti says.

Real estate auctions are also controversial, for reasons explained in a class-action lawsuit against Kennedy Wilson and other auction companies filed last year in federal court in California, and since remanded to Los Angeles Superior Court. The lawsuit seeks a stop to “misleading, unfair, illegal, and fraudulent business practices” by the $20 billion-a-year real estate auction industry. One plaintiff, Laura Torres, claims she bid $153,000 on a home with a starting bid of $95,000; after signing contracts to buy the home, the seller’s preferred lender, Countrywide, called to demand an additional $50,000 before closing.

Attorneys with Spainhour Law Group, which filed the lawsuit, did not immediately return SFR’s calls.

“Lenders went from sub-prime mortgages to this: ‘GOING ONCE, GOING TWICE, SOLD,’” the lawsuit says. “Many modern real estate auctions are nothing more than a bait and switch scheme to lure hopeful buyers to submit offers that can later be accepted or rejected…despite the general public’s perception that once the auctioneer declares, ‘SOLD,’ the property is in fact sold.”

Ferranti tells SFR that buyers “absolutely” have the same consumer protections as they would in a traditional home sale.

“It’s just as if you’re walking into a sales office,” Ferranti says.

In other words, caveat emptor.

After making winning bids, buyers are taken—Beahm says “escorted,” the lawsuit says “scurried”—away to a signing room, where they are presented with a stack of sales contracts and mortgage documents. The point is not to close a sale at the price named by the winning bidder, the lawsuit claims; “rather they are just there [to] sell loans and other settlement services.”

The preferred lender in the Zocalo auction is not the infamous Countrywide, as in the California lawsuit, but 1st Metropolitan Mortgage. That company has no history of violations in New Mexico, according to the state Regulation and Licensing Department website.

Reached by SFR, two brokers who used to sell Zocalo units, Moo Thorpe and Chris Haynes, profess ignorance to all aspects of the auction. Haynes says he’s spoken about it with “a few” current Zocalo residents—who may have purchased units at higher prices than those now being advertised. Rather than being upset, Haynes says, they were “curious and wondering what was going on.”

Back in the conference room, a Zocalo representative says approximately 60 percent of the occupied units are second homes, with 40 percent belonging to full-time residents. Most of the homes up for auction are at the development’s northernmost phase, closer to the highway.

A woman asks whether Zocalo’s developers are about to file for bankruptcy. No, the Zocalo rep says; sales proceeds from the auction will be used to finance a new phase of construction.

The Zocalo auction is Oct. 4 at Bishop’s Lodge Ranch Resort & Spa. Attendance requires pre-qualifying with 1st Metropolitan Mortgage and submitting a $1,000 deposit check. According to Beahm, “60 or 70” people had registered as of Sept. 27. Recording equipment will not be allowed at the auction, Beahm says.